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Should you E-file this year? Pros and cons

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in Small Business Tax,Small Business Tax Deduction Strategies

If you’ve been filing paper tax returns for years or you simply let your accountant handle the whole thing, preparing and filing your return online this year may intrigue you.

Should you do it? The IRS says 73 million taxpayers filed electronically in 2005.

Our advice: While do-it-yourself online filing offers some obvious advantages, it’s not for everyone.

Here’s why: Business owners with complex returns may need more hands-on tax planning advice than tax software can offer. A good tax adviser should find enough hidden tax breaks to more than pay for his or her fee.

On the other hand, those with enough gumption and tax smarts may have the conviction to go it alone.

Starting point: Go directly to the IRS Web site at www.irs.gov. Then click on the E-file icon on the left side. The page offers options to individuals, small business owners and nonprofit entities.

You don’t file directly from the IRS site. Instead, the IRS contracts with private companies that provide the means to file online. Some services offer free filing for certain income or age groups, but others charge a filing fee.

To file your return, just key in the information requested from your W-2s, 1099s and other tax reports. The software automatically calculates your tax return.

Pros: convenience, accuracy, speed

  • Convenience and portability. You can start the return on your office computer and finish it on your home PC. The program saves the information as you go, so you can access the partially completed, password-protected return wherever and whenever you log on.
     
  • Accuracy. E-filing ensures that the return includes all the necessary forms and information. If it doesn’t or it shows incorrect data, the software flags your error. You can correct the return pronto without any hassle.
     
  • Speed. E-filing is appealing if you’re due a refund. As opposed to a six-to-eight week wait for paper filing, you can expect your refund within about two weeks. The IRS will even deposit the funds directly into a designated account.

    New for 2006 returns: The refund can be split among three different accounts. If you owe Uncle Sam money, it will accept payment from your bank account or credit card.
     
  • Cost. The fees for online services remain cheap. You don’t have to pay until the end of the process, when you’re fully satisfied.

Cons: little advice, privacy concerns

  • Lack of advice. Most important, don’t expect extensive advice if you file online. Some online tax preparation sites will prompt you to see if you’re entitled to various deductions or credits, but you won’t receive any expert personalized tax planning.
     
  • Privacy concerns. You may be bothered by a perceived lack of privacy. While the tax agency password protects most IRS-approved sites, you may not want your most intimate financial secrets floating around in cyberspace.
     
  • Hidden fees. It’s rare, but you could end up paying a lot more than you originally intended (say, $200 instead of the $30 originally quoted).

Tip: The IRS requires certain business taxpayers, such as midsize and large corporations, to file electronically. So the choice may not be up to you.

Online resources:

Here are several Web sites that can make the tax season less taxing:

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